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Income Tax Notice for High Cash Deposit – What to Do Immediately (Complete Practical & Legal Guide)

Receiving an income tax notice for high cash deposit is one of the most common and most misunderstood experiences for taxpayers in India today. Every year, thousands of salaried individuals, small business owners, traders, professionals, and even senior citizens receive such notices — often without understanding what triggered it, what the department expects, or what mistake they may have made.

The first reaction is usually fear.

But fear leads to bad replies, delayed responses, and sometimes complete silence — which is exactly what worsens the situation.

This detailed guide explains how cash deposit notices actually work, why they are issued, what the law allows, how to reply step by step, what documents protect you, and how to avoid such notices permanently.

This is written from a real-life compliance and litigation perspective, not from textbooks.

Why Income Tax Notices for Cash Deposits Have Increased Drastically

The Indian income tax system has changed completely in the last few years.

Earlier:

Notices depended heavily on human discretion
Officers relied on limited information
Cash-heavy activities often escaped scrutiny

Today:

Banks automatically report transactions
Data flows directly into central systems
Algorithms compare deposits with income
Scrutiny is machine-selected, not officer-selected

In simple words:
The system now questions cash before any officer does.

No complaint is needed.
No rival needs to report you.
No random targeting happens.

If your cash movement does not logically match your income profile, the system flags it.

How the Income Tax Department Knows About Your Cash Deposits

Banks and financial institutions are legally required to submit Statement of Financial Transactions (SFT) to the Income Tax Department.

These include:

Cash deposits
Cash withdrawals
High-value transactions

This information is reflected in:

AIS (Annual Information Statement)
TIS (Taxpayer Information Summary)

Your income tax return is compared with TIS, not just Form 26AS.

Once a mismatch appears, the notice is auto-generated.

Cash Deposit Limits That Commonly Trigger Scrutiny

Savings Bank Account

Cash deposits of ₹10 lakh or more in a financial year
Includes cumulative deposits across all branches
Includes multiple smaller deposits adding up to ₹10 lakh

Current Bank Account

Cash deposits of ₹50 lakh or more in a financial year
Mainly monitored for businesses and traders

Additional Behaviour-Based Triggers

Frequent withdrawals followed by redeposits
Sudden spike in cash deposits compared to earlier years
Cash deposits not matching profession or turnover
Dormant accounts suddenly receiving heavy cash

Types of Income Tax Notices Issued for Cash Deposits

Notice under Section 143(1)

Automated processing notice
Usually arises from mismatch with reported data
Often results in tax demand or adjustment

Notice under Section 142(1)

Detailed information request
Seeks explanation and supporting documents

Notice under Section 148 (Reassessment)

Issued when department believes income escaped assessment
Can reopen past years within prescribed time limits

Each notice requires a different reply approach.
Replying blindly can escalate the matter.

One Critical Truth: Cash Deposit Is NOT Illegal

There is no section in the Income Tax Act that prohibits depositing cash into a bank account.

The law does not say:

“Cash deposits are banned”
“Cash income is illegal”

What the law requires is:

Disclosure
Explanation
Evidence

If cash is genuine and properly explained, it is lawful.

Problems arise only when:

Source is unclear
Explanation is inconsistent
Documents are missing
Replies are delayed or ignored

Common Genuine Sources of Cash (When Properly Documented)

Cash deposits can be explained through many legitimate sources, such as:

Salary withdrawn earlier and redeposited
Business cash sales
Cash received from customers or debtors
Loans received from banks or relatives
Gifts received from specified relatives
Old household savings accumulated over years
Agricultural income (supported by land records)

⚠️ Claiming any of these without proof is treated as unexplained income.

Documents Required to Defend a Cash Deposit Notice

Your reply is only as strong as your documents.

Typically required documents include:

Complete bank statements
Cash book or daily cash flow statement
Salary slips and Form 16 (for salaried persons)
Sales invoices and books of accounts (for business owners)
Loan agreements or lender confirmations
Gift deeds or donor confirmations
Past income tax returns
Withdrawal history showing redeposit trail

A logical and consistent cash trail is the strongest defence.

Step-by-Step: How to Reply to an Income Tax Notice for High Cash Deposit

Step 1: Carefully Read the Notice

Check:

Assessment year
Section under which notice is issued
Specific issue raised

Never assume. Always read carefully.

Step 2: Identify the Exact Mismatch

Determine whether the issue relates to:

Cash deposit vs declared income
Interest mismatch
AIS reporting difference

Misidentifying the issue leads to wrong replies.

Step 3: Prepare a Clear Cash Flow Explanation

Your explanation must clearly show:

Source of cash
Date-wise inflow and outflow
Purpose of deposit

Avoid vague statements like “personal savings”.

Step 4: Attach Supporting Evidence

Documents must:

Match the amounts
Match the timeline
Be readable and relevant

Step 5: Submit Reply Before Due Date

Late replies weaken credibility and increase penalty exposure.

What Happens If You Ignore a Cash Deposit Notice

Ignoring an income tax notice is treated as non-cooperation.

Consequences may include:

Best judgment assessment
High tax demand
Penalty for under-reporting
Interest liability
Prosecution proceedings
Bank account attachment

Silence almost always worsens the outcome.

Penalty Risk in Unexplained Cash Cases

If the explanation is rejected:

Cash may be taxed at 60%
Surcharge and cess apply
Effective tax can exceed 78%
Separate penalty proceedings may follow

This is why quality of explanation matters more than deposit size.

Common Mistakes Taxpayers Make in Cash Deposit Replies

Giving emotional explanations instead of factual ones
Uploading irrelevant documents
Missing timelines
Admitting mistakes unnecessarily
Copy-pasting generic replies
Ignoring AIS data

These mistakes convert a manageable notice into litigation.

How to Avoid Cash Deposit Notices in Future Years

Always check AIS before filing ITR
Maintain proper cash books
Avoid unnecessary cash rotation
Prefer banking channels wherever possible
Keep proof for all major receipts
Monitor tax portal regularly

Prevention is cheaper than defence.

Importance of Professional Handling

Cash deposit notices involve:

Legal interpretation
Data reconciliation
Strategy, not just compliance

At Kyna FinTax, cash deposit notices are handled with a data-aligned and documentation-driven approach, ensuring explanations are consistent with AIS, bank reporting, and declared income — reducing the risk of reassessment and penalty proceedings.

Final Reality Check

The tax system has changed.